WHAT IS ECONOMICS?
CHAPTER ONE
OBJECTIVE I:
EXPLAIN WHY
SCARCITY AND
CHOICE ARE BASIC
ECONOMIC PROBLEMS
What Is Economics?
 Economics is the study of how people
make choices to satisfy their wants
 For example:
 You
must choose how to spend your time
 Businesses must choose how many
people to hire
Scarcity and Shortages
 Scarcity occurs
when there are
limited quantities
of resources to
meet unlimited
needs or desires
 Major Point: Our
wants are
unlimited
 Shortages occur
when producers
will not or cannot
offer goods or
services at current
prices
OBJECTIVE II:
IDENTIFY LAND, LABOR,
AND CAPITAL AS THE
THREE FACTORS OF
PRODUCTION, AND
IDENTIFY THE TWO TYPES
OF CAPITAL
The Factors of Production
 Land All natural resources that are
used to produce goods and services.
 Labor Any effort a person devotes to a
task for which that person is paid.
 Capital Any human-made resource
that is used to create other goods and
services.
Physical Capital vs. Human Capital
 Physical Capital –
 Human Capital –
Any machine or
building that
creates more usable
things
 Example: Hammer,
Factory, Computer
Any sort of skill or
knowledge that
helps to create
usable things
 Example:
Education,
Experience
The Factors of Popcorn Production
Land
Labor
Capital
Popping Corn
The human effort needed
to pop the corn
Corn-Popping
Device
Vegetable Oil
Section 1 Assessment
1. What is the difference between a shortage and scarcity?
(a) A shortage can be temporary or long-term, but scarcity always exists.
(b) A shortage results from rising prices; a scarcity results from falling prices.
(c) A shortage is a lack of all goods and services; a scarcity concerns a single item.
(d) There is no real difference between a shortage and a scarcity.
2. Which of the following is an example of using physical capital to save time and
money?
(a) hiring more workers to do a job
(b) building extra space in a factory to simplify production
(c) switching from oil to coal to make production cheaper
(d) lowering workers’ wages to increase profits
Section 1 Assessment
1. What is the difference between a shortage and scarcity?
(a) A shortage can be temporary or long-term, but scarcity always exists.
(b) A shortage results from rising prices; a scarcity results from falling prices.
(c) A shortage is a lack of all goods and services; a scarcity concerns a single item.
(d) There is no real difference between a shortage and a scarcity.
2. Which of the following is an example of using physical capital to save time and
money?
(a) hiring more workers to do a job
(b) building extra space in a factory to simplify production
(c) switching from oil to coal to make production cheaper
(d) lowering workers’ wages to increase profits
Opportunity Cost
CHAPTER 1
SECTION 2
OBJECTIVE 1
DESCRIBE WHY EVERY
DECISION INVOLVES TRADEOFFS.
Trade-offs and Opportunity Cost
 Trade-offs are all the alternatives that we give up
whenever we choose one course of action over
others.
 The most desirable alternative given up as a result
of a decision is known as opportunity cost.
All individuals and groups of people make
decisions that involve trade-offs.
Trade-offs
 Individuals
 Businesses
 Society – guns v. butter
OBJECTIVE II:
EXPLAIN THE CONCEPT OF
OPPORTUNITY COST
The Decision-Making Grid
 Economists encourage us to consider the benefits and
costs of our decisions.
Karen’s Decision-making Grid
Alternatives
Sleep late
Wake up early to study
Benefits
• Enjoy more sleep
• Have more energy during the day
• Better grade on test
• Teacher and parental approval
• Personal satisfaction
Decision
• Sleep late
• Wake up early to study for test
Opportunity cost
• Extra study time
• Extra sleep time
Benefits forgone
• Better grade on test
• Teacher and parental approval
• Personal satisfaction
• Enjoy more sleep
• Have more energy during the day
Decision Making Grids (a closer look)
 Decision Making grids only tell you about
some of the opportunity costs available
 They do not tell you the only courses of
action
 Sometimes solutions lie outside of the box
(something that has not yet been thought of
or tried)
OBJECTIVE III:
EXPLAIN HOW PEOPLE MAKE
DECISIONS BY THINKING AT THE
MARGIN
 Thinking at the Margin:
 When you decide how much more or less to
do, you are thinking at the margin.
 For example…..
Options
Benefit
Opportunity Cost
1st hour of extra
study time
Grade of C on
test
1 hour of
sleep
2nd hour of extra
study time
Grade of B on
test
2 hours of
sleep
3rd hour of extra
study time
Grade of B+ on
test
3 hours of
sleep
Section 2 Assessment
1. Opportunity cost is
(a) any alternative we sacrifice when we make a decision.
(b) all of the alternatives we sacrifice when we make a decision.
(c) the most desirable alternative given up as a result of a decision.
(d) the least desirable alternative given up as a result of a decision.
2. Economists use the phrase “guns or butter” to describe the fact that
(a) a person can spend extra money either on sports equipment or food.
(b) a person must decide whether to manufacture guns or butter.
(c) a nation must decide whether to produce more or less military or consumer
goods.
(d) a government can buy unlimited military and civilian goods if it is rich
enough.
Section 2 Assessment
1. Opportunity cost is
(a) any alternative we sacrifice when we make a decision.
(b) all of the alternatives we sacrifice when we make a decision.
(c) the most desirable alternative given up as a result of a decision.
(d) the least desirable alternative given up as a result of a decision.
2. Economists use the phrase “guns or butter” to describe the fact that
(a) a person can spend extra money either on sports equipment or food.
(b) a person must decide whether to manufacture guns or butter.
(c) a nation must decide whether to produce more or less military or consumer
goods.
(d) a government can buy unlimited military and civilian goods if it is rich enough.
Production Possibilities Graphs
CHAPTER 1 SECTION 3
OBJECTIVE I:
INTERPRET A PRODUCTION
POSSIBILITIES CURVE.
Production Possibilities Graph
 A production possibilities graph shows
alternative ways that an economy can use its
resources.
 The production possibilities frontier is the
line that shows the maximum possible
output for that economy.
Production Possibilities Graph
Production Possibilities Graph
25
0
15
8
14
14
12
18
9
20
5
21
0
Shoes (millions of pairs)
Watermelons
Shoes
(millions of tons) (millions of pairs)
20
15
10
a (0,15)
b (8,14)
c (14,12)
d (18,9)
5
0
A production
possibilities frontier
e (20,5)
f (21,0)
5
10
15
20
25
Watermelons (millions of tons)
Efficiency
using resources in
such a way as to
maximize the
production of goods
and services. An
economy producing
output levels on the
production
possibilities frontier
is operating
efficiently.
Production Possibilities Graph
25
Shoes (millions of pairs)
 Efficiency means
20
S
15
a (0,15)
b (8,14)
c (14,12)
10
g (5,8)
5
d (18,9)
e (20,5)
A point of
underutilization
0
5
10
f (21,0)
15
20
Watermelons (millions of tons)
25
Growth
 Growth If more resources
Production Possibilities Graph
25
Future production
Possibilities frontier
T
Shoes (millions of pairs)
become available, or if
technology improves, an
economy can increase its level
of output and grow. When
this happens, the entire
production possibilities curve
“shifts to the right.”
20
S
15
a (0,15)
b (8,14)
c (14,12)
10
d (18,9)
5
e (20,5)
f (21,0)
0
5
10
15
20
Watermelons (millions of tons)
25
COST
 Cost A production possibilities graph shows the cost
of producing more of one item. To move from point
c to point d on this graph has a cost of 3 million pairs
of shoes.
Cost
Production Possibilities Graph
25
0
15
8
14
14
12
18
9
20
5
21
0
Shoes (millions of pairs)
Watermelons
Shoes
(millions of tons) (millions of pairs)
20
15
c (14,12)
10
d (18,9)
5
0
5
10
15
20
25
Watermelons (millions of tons)
Section 3 Assessment
1. A production possibilities frontier shows
(a) farm goods and factory goods produced by an economy.
(b) the maximum possible output of an economy.
(c) the minimum possible output of an economy.
(d) underutilization of resources.
2. An economy that is using its resources to produce the maximum number of goods and
services is described as
(a) efficient.
(b) underutilized.
(c) growing.
(d) trading off.
Section 3 Assessment
1. A production possibilities frontier shows
(a) farm goods and factory goods produced by an economy.
(b) the maximum possible output of an economy.
(c) the minimum possible output of an economy.
(d) underutilization of resources.
2. An economy that is using its resources to produce the maximum number of goods and
services is described as
(a) efficient.
(b) underutilized.
(c) growing.
(d) trading off.